Correlation Between Select Sector and Vanguard World

Can any of the company-specific risk be diversified away by investing in both Select Sector and Vanguard World at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Select Sector and Vanguard World into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between The Select Sector and Vanguard World, you can compare the effects of market volatilities on Select Sector and Vanguard World and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Select Sector with a short position of Vanguard World. Check out your portfolio center. Please also check ongoing floating volatility patterns of Select Sector and Vanguard World.

Diversification Opportunities for Select Sector and Vanguard World

-0.68

Correlation Coefficient

Select Sector  Vanguard World

Excellent diversification

The 3 months correlation between Select and Vanguard is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and Vanguard World in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard World and Select Sector is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on The Select Sector are associated (or correlated) with Vanguard World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard World has no effect on the direction of Select Sector i.e., Select Sector and Vanguard World go up and down completely randomly.

Pair Corralation between Select Sector and Vanguard World

Assuming the 90 days trading horizon Select Sector is expected to generate 2.35 times less return on investment than Vanguard World. But when comparing it to its historical volatility, The Select Sector is 1.27 times less risky than Vanguard World. It trades about 0.04 of its potential returns per unit of risk. Vanguard World is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  221,100  in Vanguard World on February 5, 2024 and sell it today you would earn a total of  5,400  from holding Vanguard World or generate 2.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	95.24%
Values	Daily Returns

The Select Sector  vs.  Vanguard World

Select Sector

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong forward-looking signals, Select Sector is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard World

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard World are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical and fundamental indicators, Vanguard World showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Select Sector and Vanguard World

The main advantage of trading using opposite Select Sector and Vanguard World positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Select Sector position performs unexpectedly, Vanguard World can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Vanguard World will offset losses from the drop in Vanguard World's long position.

The idea behind The Select Sector and Vanguard World pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.